EMERGING MARKETS-Stocks, FX set for monthly losses; Fed rate verdict in focus

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China's factory activity shrinks in Jan

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EM stocks, FX set for weakest month since August

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Taiwan Q4 preliminary GDP beats forecast

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Fed rate decision due 1900 GMT

By Amruta Khandekar

Jan 31 (Reuters) - Emerging market stocks fell on Wednesday as dismal factory activity data from China added to worries about its economic woes while most currencies were subdued in the run up to the Federal Reserve's interest rate decision.

MSCI's index of emerging market (EM) equities was down 0.5% by 0957 GMT, while a gauge of regional currencies was flat against a firm dollar.

Both EM stocks and currencies were set to end the first month of 2024 with their biggest monthly percentage drop since August as reduced bets of U.S. interest rate cuts and fresh concerns about China's faltering economy sapped risk appetite.

Equities in mainland China and Hong Kong shed 0.9% and 1.4% on Wednesday after data showed China's manufacturing activity contracted for the fourth straight month in January.

The blue-chip index was headed for its sixth straight month in the red.

The Fed's policy decision, due at 1400 ET (1900 GMT), followed by commentary from Fed Chair Jerome Powell, is a key catalyst for the dollar and emerging markets as it will shape expectations for the timing of U.S. rate cuts.

Investors have pushed back expectations of the first rate cut from March to May given evidence of resilience in the U.S. economy.

"If Powell is more decisive than last time in pushing back against the rather ambitious expectations for this year, then the dollar should benefit again," said Michael Pfister, FX analyst at Commerzbank in a note.

Among currencies, the South African rand firmed 0.5% against the dollar.

The Turkish lira was flat at 30.359 against the dollar. Data showed the country's foreign trade deficit narrowed 3.2% year-on-year to $105.99 billion in 2023 while tourism revenues hit a record high.

In other news, Asian central banks may see scope to loosen monetary policy later this year as inflation moderates, the International Monetary Fund said on Wednesday.

Data showed Taiwan's trade-dependent economy grew faster than expected in the fourth quarter. The Taiwan dollar was down 0.3%.

"We believe the tech-export recovery and Taiwan's place in the AI-related supply chain are likely to provide additional lift in 2024," Barclays analysts said in a note.

HIGHLIGHTS

** Indian stocks gain a day before interim budget announcement ** Chile, Colombia and Brazil expected to cut rates later in the day

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(Reporting by Amruta Khandekar; Editing by Andrew Cawthorne)